Date: Jan 2017
A recent decision in the District of Alaska emphasizes the importance of government knowledge1 to show not only that a defendant acted without the requisite scienter under the False Claims Act (FCA), but also that the claims and statements at issue were not false within the meaning of the FCA. See United States ex rel. Berg v. Honeywell Int’l, Inc., No. 3:07-cv-00215-SLG, 2016 U.S. Dist. LEXIS 180021 (D. Alaska Dec. 29, 2016). While many courts emphasize the relevance of government knowledge to a defendant’s intent, the government’s awareness and approval of the defendant’s conduct can be highly relevant to falsity and materiality as well. Defendants should seek to marshal evidence of government knowledge to defeat each element of an FCA claim.
In Berg, the relators alleged that Honeywell International, Inc. (Honeywell) fraudulently induced two task orders to improve energy efficiency at the Fort Richardson Army Base in Anchorage, Alaska. The applicable law governing the energy savings program (42 U.S.C. § 8287) required Honeywell to calculate the anticipated savings by determining the difference between the estimated future baseline costs (i.e., the cost of continuing to operate without improvements) and the estimated post-improvement costs. Honeywell’s proposals included detailed calculations developed with involvement from the government’s engineers and the “back-up data” supporting those calculations. Generally, the relators alleged that Honeywell knowingly submitted false calculations that inflated the projected baseline costs and underestimated projected post-improvement costs to induce the government to accept its proposed improvements.
On December 29, 2016, the court granted Honeywell’s motion for summary judgment. The decision contains an extensive discussion and application of the so-called “government knowledge” defense. Notably, the court recognized that government knowledge was “highly relevant” to both the scienter and falsity elements.
First, the court held that Honeywell’s close working relationship with the government, and the fact that “Honeywell was transparent about how it reached its numbers” precluded a finding of scienter. The court identified a number of important facts supporting this conclusion, including:
Accordingly, even assuming arguendo some of Honeywell’s calculations were incorrect, the court found there was no evidence of bad faith. Repeating the Ninth Circuit’s oft-cited pronouncement that “the common failings of engineers and other scientists are not culpable [under] the [FCA],” the court held that the relators failed to show that Honeywell acted with the requisite scienter.
Second, the court held that Honeywell’s full disclosure of the “assumptions and math underlying its estimates” precluded a finding that Honeywell made false statements. It is here that the court’s decision is particularly notable and useful for defendants, as courts are less likely to address government knowledge in the context of falsity. In rejecting the relators’ argument that Honeywell made several unwarranted and overly aggressive assumptions related to projected cost savings, the court found that Honeywell had disclosed the full context surrounding those assumptions and calculations. The court noted that “[o]ptimism, even ill-founded optimism, does not render a statement false.”
Similarly, the court held that any suggestion by Honeywell that the task orders and payments were “legal” under the governing energy savings statute and the Anti-Deficiency Act were opinions about a “complex” issue of statutory interpretation and could not constitute a “false” statement under the FCA. The court noted that the government “is just as well-situated (indeed, perhaps better situated)” to evaluate such issues and noted that the government was aware of the issues through the parties’ discussions.
This decision is a reminder to defendants that government knowledge can be highly relevant to more than just a defendant’s intent. Where a defendant has worked closely with the government to solve a complex problem or has engaged in back-and-forth discussions regarding the meaning of a contract term or regulation, the resulting government knowledge can also negate a finding of falsity by showing that the defendant and the government had reached a common interpretation of the statements, terms or regulations at issue. Similarly, under the Supreme Court’s recent decision in Universal Health Services, Inc. v. U.S. ex rel. Escobar, defendants can use their communications with the government to show that the an alleged regulatory or contractual non-compliance was not material because the government continued to pay claims despite its awareness of the alleged violation.
1. Although many cases, including Berg, refer to a “government knowledge defense,” “government knowledge” is not an independent or statutory defense at all. Most circuit courts have held that, under certain circumstances, government knowledge can negate one or more of the elements of a claim under the FCA.